Solution manual cost accounting 14e by horngren 18 chapter

CHAPTER 18SPOILAGE, REWORK, AND SCRAP18-1 Managers have found that improved quality and intolerance for high spoilage havelowered overall costs and increased sales.18-2 Spoilage—units of production that do not meet the standards required by customers forgood units and that are discarded or sold at reduced prices.Rework—units of production that do not meet the specifications required by customersbut which are subsequently repaired and sold as good finished units.Scrap—residual material that results from manufacturing a product. It has low total salesvalue compared to the total sales value of the product.18-3 Yes. Normal spoilage is spoilage inherent in a particular production process that ariseseven under efficient operating conditions. Management decides the spoilage rate it considersnormal depending on the production process.18-4 Abnormal spoilage is spoilage that is not inherent in a particular production process andwould not arise under efficient operating conditions. Costs of abnormal spoilage are ―lost costs,‖measures of inefficiency that should be written off directly as losses for the accounting period.18-5 Management effort can affect the spoilage rate. Many companies are relentlesslyreducing their rates of normal spoilage, spurred on by competitors who, likewise, arecontinuously reducing costs.

18-6 Normal spoilage typically is expressed as a percentage of good units passing theinspection point. Given actual spoiled units, we infer abnormal spoilage as follows:Abnormal spoilage = Actual spoilage – Normal spoilage.18-7 Accounting for spoiled goods deals with cost assignment, rather than with costincurrence, because the existence of spoiled goods does not involve any additional cost beyondthe amount already incurred.18-8 Yes. Normal spoilage rates should be computed from the good output or from the normalinput, not the total input. Normal spoilage is a given percentage of a certain output base. Thisbase should never include abnormal spoilage, which is included in total input. Abnormalspoilage does not vary in direct proportion to units produced, and to include it would cause thenormal spoilage count to fluctuate irregularly and not vary in direct proportion to the outputbase.18-9 Yes, the point of inspection is the key to the assignment of spoilage costs. Normalspoilage costs do not attach solely to units transferred out. Thus, if units in ending work inprocess have passed inspection, they should have normal spoilage costs added to them.18-10 No. If abnormal spoilage is detected at a different point in the production cycle thannormal spoilage, then unit costs would differ. If, however normal and abnormal spoilage aredetected at the same point in the production cycle, their unit costs would be the same.

18-11 No. Spoilage may be considered a normal characteristic of a given production cycle. Thecosts of normal spoilage caused by a random malfunction of a machine would be charged as apart of the manufacturing overhead allocated to all jobs. Normal spoilage attributable to aspecific job is charged to that job.18-12 No. Unless there are special reasons for charging normal rework to jobs that containedthe bad units, the costs of extra materials, labor, and so on are usually charged to manufacturingoverhead and allocated to all jobs.18-13 Yes. Abnormal rework is a loss just like abnormal spoilage. By charging it tomanufacturing overhead, the abnormal rework costs are spread over other jobs and also includedin inventory to the extent a job is not complete. Abnormal rework is rework over and above whatis expected during a period, and is recognized as a loss for that period.18-14 A company is justified in inventorying scrap when its estimated net realizable value issignificant and the time between storing it and selling or reusing it is quite long.18-15 Companies measure scrap to measure efficiency and to also control a tempting source oftheft. Managers of companies that report high levels of scrap focus attention on ways to reduce

scrap and to use the scrap the company generates more profitably. Some companies, forexample, might redesign products and processes to reduce scrap. Others may also examine if thescrap can be reused to save substantial input costs.18-16 (5–10 min.) Normal and abnormal spoilage in units.1.

2.

Total spoiled unitsNormal spoilage in units, 5%Abnormal spoilage in units

Regardless of the targeted normal spoilage, abnormal spoilage is non-recurring andavoidable. The targeted normal spoilage rate is subject to change. Many companies have reducedtheir spoilage to almost zero, which would realize all potential savings. Of course, zero spoilageusually means higher-quality products, more customer satisfaction, more employee satisfaction,and various beneficial effects on nonmanufacturing (for example, purchasing) costs of directmaterials.

From below, 11,150 total units are accounted for. Therefore, units started during current period must be = 11,150 – 1,000 = 10,150.*Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%.†Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%.‡Degree of completion in this department: direct materials, 100%; conversion costs, 30%.

18-18 (20 25 min.) Weighted-average method, assigning costs (continuation of 18-17).Solution Exhibit 18-18 summarizes total costs to account for, calculates the costs per equivalentunit for direct materials and conversion costs, and assigns total costs to units completed andtransferred out (including normal spoilage), to abnormal spoilage, and to units in ending work inprocess.SOLUTION EXHIBIT 18-18Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign TotalCosts to Units Completed, to Spoiled Units, and to Units in Ending Work in Process;Weighted-Average Method of Process Costing,Gray Manufacturing Company, November 2012.TotalProductionCosts$ 2,53339,930$42,463

(Step 3)

Work in process, beginning (given)Costs added in current period (given)Total costs to account for

(Step 4)

Costs incurred to dateDivided by equivalent units of work done to dateCost per equivalent unit

18-20 (20 25 min.) FIFO method, assigning costs (continuation of 18-19).Solution Exhibit 18-20 summarizes total costs to account for, calculates the costs per equivalentunit for direct materials and conversion costs, and assigns total costs to units completed andtransferred out (including normal spoilage), to abnormal spoilage, and to units in ending work inprocess.SOLUTION EXHIBIT 18-20Summarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign TotalCosts to Units Completed, to Spoiled Units, and to Units in Ending Work in Process;FIFO Method of Process Costing,Gray Manufacturing Company, November 2012.TotalProductionCosts$ 2,53339,930$42,463

(Step 3) Work in process, beginning (given)Costs added in current period (given)Total costs to account for(Step 4) Costs added in current periodDivided by equivalent units of work done in current periodCost per equivalent unit(Step 5) Assignment of costs:Good units completed and transferred out (9,000 units)Work in process, beginning (1,000 units)Costs added to beg. work in process in current periodTotal from beginning inventory before normalspoilageStarted and completed before normal spoilage (8,000 units)Normal spoilage (100 units)(A)Total costs of good units completed and transferred out(B)Abnormal spoilage (50 units)(C)Work in process, ending (2,000 units)(A)+(B)+(C) Total costs accounted fora

2. Solution Exhibit 18-21B summarizes total costs to account for, calculates the costs perequivalent unit for direct materials and conversion costs, and assigns total costs to unitscompleted and transferred out (including normal spoilage), to abnormal spoilage, and to units inending work in process, using the weighted-average method.SOLUTION EXHIBIT 18-21BSummarize Total Costs to Account For, Compute Cost per Equivalent Unit, and Assign TotalCosts to Units Completed, to Spoiled Units, and to Units in Ending Work in Process;Weighted-Average Method of Process Costing,Appleton Company, August 2012.TotalProductionCosts$ 28,600174,300$202,900

(Step 3)

Work in process, beginning (given)Costs added in current period (given)Total costs to account for

(Step 4)

Costs incurred to dateDivide by equivalent units of work done to dateCost per equivalent unit

18-22 (10 min.) Standard costing method, spoilage, journal entries.Spoilage represents the amount of resources that go into the process, but do not result in finishedproduct. A simple way to account for spoilage in process costing is to calculate the amount ofdirect material that was spoiled. The journal entry to record the spoilage incurred in Jordan’sproduction process is:Manufacturing overhead control (normal spoilage)Work-in-process inventory (cost of spoiled sheet metal)

475475

18-23 (15 min.) Recognition of loss from spoilage.1. The unit cost of making the 8,000 units is:$320,000 ÷ 8,000 units = $40 per unit2. The total cost of the 300 spoiled units is:$40 × 300 units = $12,0003. The increase in the per-unit cost of goods sold as a result of the normal spoilage is:$12,000 ÷ 7,700 good units = $1.56Unit cost of goods sold for units remaining after the spoilage = $40 + $1.56 = $41.56. (Or$320,000 ÷ 7,700 = $41.56)4. The $12,000 cost for the 300 spoiled units is taken out of manufacturing costs and expensed inthe period of the spoilage. The journal entry to record the abnormal spoilage incurred is:Loss from abnormal spoilage12,000Work-in-process control12,000

18-26 (30 min.) Standard-costing method, spoilage.1.Solution Exhibit 18-25, Panel A, shows the computation of the equivalent units of workdone in September 2011 for direct materials (2,550 units) and conversion costs (2,700 units).(This computation is the same for FIFO and standard-costing.)2.The direct materials cost per equivalent unit of beginning work in process and of workdone in September 2011 is the standard cost of $200 given in the problem.The conversion cost per equivalent unit of beginning work in process and of work donein September 2011 is the standard cost of $75 given in the problem.Solution Exhibit 18-26 summarizes the total costs to account for, and assigns these coststo units completed (including normal spoilage), to abnormal spoilage, and to units in endingwork in process using the standard costing method.SOLUTION EXHIBIT 18-26Standard Costing Method of Process Costing with Spoilage;Chipcity, September 2011.Steps 3, 4, and 5—Summarize Total Costs to Account For, Compute Cost per EquivalentUnit, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in EndingWork in Process

(Step 3) Work in process, beginning*Costs added in current period at standard pricesCosts to account for

Remaining cases cost = $9.00 per case. The cost of these cases is unaffected by the lossfrom abnormal spoilage.2.

a.

Cash

840Work-in-Process Control

840

The cost of the remaining good cases = [($9.00 2,100) – $840] = $18,060The unit cost of a good case now becomes $18,060 1,680 = $10.75b.

CashManufacturing Department Overhead ControlWork-in-Process Control

8402,9403,780

The unit cost of a good case remains at $9.00.

3.

c.

The unit costs in 2a and 2b are different because in 2a the normal spoilage cost ischarged as a cost of the job which has exacting job specifications. In 2b however,normal spoilage is due to the production process, not the particular attributes of thisspecific job. These costs are, therefore, charged as part of manufacturing overheadand the manufacturing overhead cost of $2 per case already includes a provision fornormal spoilage.

The unit costs in 3a and 3b are different because in 3a the normal rework cost ischarged as a cost of the job which has exacting job specifications. In 3b however,normal rework is due to the production process, not the particular attributes of thisspecific job. These costs are, therefore, charged as part of manufacturing overheadand the manufacturing overhead cost of $2 per case already includes a provision forthis normal rework.

The two alternative approaches to account for the materials costs of reworked units are:a. To charge the costs of rework to the current period as a separate expense item asabnormal rework. This approach would highlight to White Goods the costs of thesupplier problem.b. To charge the costs of the rework to manufacturing overhead as normal rework.

2.The $50 tumbler cost is the cost of the actual tumblers included in the washing machines.The $44 tumbler units from the first supplier were eventually never used in any washingmachine, and that supplier is now bankrupt. The units have now been disposed of at zerodisposal value.3.

The total costs of rework due to the defective tumbler units include the following:a. the labor and other conversion costs spent on substituting the new tumbler units;b. the costs of any extra negotiations to obtain the replacement tumbler units;c. any higher price the existing supplier may have charged to do a rush order for thereplacement tumbler units; andd. ordering costs for the replacement tumbler units.

18-29 (25 min.) Scrap, job costing.1.Journal entry to record scrap generated by a specific job and accounted for at the timescrap is sold is:Cash or Accounts ReceivableWork-in-Process ControlTo recognize asset from sale of scrap.A memo posting is also made to the specific job record.

520520

2.Scrap common to various jobs and accounted for at the time of its sale can be accountedfor in two ways:a.Regard scrap sales as a separate line item of revenues (the method generally used whenthe dollar amount of scrap is immaterial):Cash or Accounts ReceivableScrap RevenuesTo recognize revenue from sale of scrap.

4,4004,400

b.Regard scrap sales as offsets against manufacturing overhead (the method generally usedwhen the dollar amount of scrap is material):Cash or Accounts ReceivableManufacturing Department Overhead ControlTo record cash raised from sale of scrap.

4,4004,400

3.Journal entry to record scrap common to various jobs at the time scrap is returned tostoreroom:Materials Control4,400Manufacturing Department Overhead Control4,400To record value of scrap returned to storeroom.When the scrap is reused as direct material on a subsequent job, the journal entry is:Work-in-Process Control4,400Materials Control4,400To record reuse of scrap on a job.Explanations of journal entries are provided here but are not required.

18-31 (25 min.) FIFO method, spoilage.For the Cleaning Department, Solution Exhibit 18-31 summarizes the total costs for May,calculates the equivalent units of work done in the current period for direct materials andconversion costs, and assigns total costs to units completed and transferred out (including normalspoilage), to abnormal spoilage, and to units in ending work in process under the FIFO method.SOLUTION EXHIBIT 18-31First-in, First-out (FIFO) Method of Process Costing with Spoilage;Cleaning Department of the Boston Company for May.PANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Output inEquivalent Units

Flow of ProductionWork in process, beginning (given)Started during current period (given)To account forGood units completed and transferred out during current period:From beginning work in process||3,000 (100% 100%); 3,000 (100% 60%)Started and completed17,500 100%; 17,500 100%Normal spoilage*2,050 100%; 2,050 100%Abnormal spoilage†1,250 100%; 1,250 100%Work in process, ending‡4,200 100%; 4,200 30%Accounted forEquivalent units of work done in current period

For the Packaging Department, Solution Exhibit 18-32 summarizes total costs to account for,calculates the equivalent units of work done to date for each cost category, and assigns costs tounits completed (including normal spoilage), to abnormal spoilage, and to units in ending workin process using the weighted-average method.SOLUTION EXHIBIT 18-32Weighted-Average Method of Process Costing with Spoilage;Packaging Department of the Boston Company for May.PANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Output inEquivalent Units(Step 1)

18-33 (25 min.) FIFO method, Packaging Department (continuation of 18-31).Solution Exhibit 18-33 summarizes the total Packaging Department costs for May, shows theequivalent units of work done in the Packaging Department in the current period for transferredin costs, direct materials, and conversion costs, and assigns total costs to units completed andtransferred out (including normal spoilage), to abnormal spoilage, and to units in ending workin-process under the FIFO method.SOLUTION EXHIBIT 18-33First-in, First-out (FIFO) Method of Process Costing with Spoilage;Packaging Department of the Boston Company for May.PANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Output inEquivalent Units